Mumbai: Shares recouped some of their losses and were trading up 0.3% after dropping more than 1% on Thursday, with top lenders State Bank of India (SBI.BO) and ICICI Bank falling on worries of bad loans piling up.

Shares in SKS Microfinance dropped 20% after the country’s leading lender to tiny businesses warned that a collections ordinance enacted last month in Andhra Pradesh state, the heart of India’s microfinance sector, could impact profits.

Lenders like State Bank, ICICI Bank and HDFC Bank dropped between 2% and 5% on growing worries about their exposure to the microfinance sector, which has come under increased scrutiny.

"There are concerns that the NPAs of the banks may go up in the near future on growing troubles in the microfinance sector," said K.K. Mital, head of portfolio management services at Globe Capital in New Delhi, referring to the bad loans of banks.

At 11:58am, the 30-share BSE index was up 0.29% at 19,923.71 points, with 21 of its components rising. The index had risen as much as 0.96% in the opening deals and then fell as much as 1.3%.

Foreign funds have bought shares worth a record $28.5 billion so far in 2010, compared with last year’s $17.5 billion, pushing the market up nearly 15% so far this year.

Analysts said there were concerns that the overseas fund flows into the Indian markets could slow down on global macroeconomic concerns and issues related to the telecoms and microfinance sectors in the local market.

Shares in Indian mobile operators Reliance Communications and Unitech fell as much as 10% on Thursday after a government panel said 2G licences were given too cheaply amid allegations of corruption.

The scandal had prompted the resignation of Telecom Minister Andimuthu Raja.

“There are concerns in the minds of investors that there could be an investigation in how companies like Unitech and Reliance Communications obtained spectrum," said Arun Kejriwal, a strategist with research firm KRIS.

ICICI Bank was trading down 3.2% at Rs1,163.50 and State Bank was down 1.4% at Rs3,038.

SKS Micro was trading 19.2% lower at Rs645.90. A spokesman for the only publicly traded lender to the poor in India, said collections in states other than Andhra Pradesh are normal and that he was "shocked" by the market’s selldown.

Axis Bank fell 3% at Rs1,423, erasing gains of 2.8% in the opening deals, with some traders saying its $436 million deal to buy investment banking and broking units of Enam Securities was expensive.

In the broader market, losers led gainers in a ratio of 3:1 on volume of 228 million shares.

The 50-share NSE index was down 0.1% at 5,984 points.

Elsewhere in the region, the MSCI’s measure of Asian markets other than Japan rose 0.9% and Japan’s Nikkei was trading up 2.1%.